The New Vulcan Capital: Steve Hall and Chris Temple on Working with Paul Allen, Investing with Partners, and Banking On Seattle Innovation

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It feels like the dawn of a new era at Vulcan Capital. The private investment group, which manages billionaire Paul Allen’s personal and professional holdings, has been very private—until now, it seems. Coming off a series of high-profile successes (like BiPar Sciences, a $100 million-plus return on $13 million investment) and failures (like the Charter Communications bankruptcy), Vulcan Capital looks to be opening up a bit to the innovation community and the general public.

From the outside, at least, this is a big deal. The Vulcan Capital team has backed some of the most interesting early-stage startups around the country, and around Seattle—including AltaRock Energy, Evri, Gist, Redfin, and Smith & Tinker. But they’ve never been ones to talk to the press about exactly what they’re doing and why.

So Luke and I were excited when Vulcan Capital hosted our visit to company headquarters near Seattle’s International District this week. We sat down with Chris Temple, Vulcan Capital’s new president, and Steve Hall, the managing director who heads Vulcan Capital’s venture investments (he’s also one of the judges for Xconomy’s upcoming Battle of the Tech Bands).

Hall, who could almost pass for a cleaner-cut Mark Wahlberg, has been a venture capitalist since 1998. He got his start with Prospect Street Ventures in New York, where he funded About.com and a number of other successful Internet software startups. Before that, he was an entrepreneur and an attorney. Hall originally came to Seattle in 2002 to work with Allen. Meanwhile, Temple arrived at Vulcan last year from Tailwind Capital in New York, and was promoted to president of Vulcan Capital just this month.

In a rare in-depth interview, Hall and Temple gave us a sweeping overview of the Vulcan investment strategy—with some deep dives into various technologies and specific companies (more on that soon). They told us Vulcan Capital’s venture team has invested $115 million in 20 companies since 2003, and has helped bring in $700 million of additional capital from other investors. They touched on the “new” Vulcan vs. the “old” Vulcan, the importance of early-stage investing and forming syndication partnerships with other venture firms, and what the real opportunities are in the Seattle area and beyond. “This is one of the first conversations, since I’ve been part of the venture effort, that we’ve said what we’re doing, how we’re doing it, and why we’re doing it,” Hall says.

Here is an edited version of our interview:

Xconomy: How is it different being an investor with Vulcan Capital, as opposed to a venture firm with a network of limited partners?

Steve Hall: I’ve done both, it’s very different. This is Paul Allen’s investment vehicle. It’s his money. Every one of these deals I’ve done since I’ve been here, Paul has been integrally involved with the decision. Not only getting involved in the first place, but probably 50 follow-on transactions over the course of the years. I view that as a great benefit to us. You have someone with a diverse worldview, with many, many areas of technology, a strong understanding of science and bioscience. His intellectual curiousity and understanding of such a wide range of disciplines is very helpful, particularly as we set up to invest in early stages.

I view working with a single investor as a great value add, when they’re actively involved in the decisions. He’s not, in most cases, sitting on the boards of these companies or in product sessions with these companies, but he’s certainly involved as an investor with us. In a couple of cases, like with Evri, which we incubated here, Paul was involved in the conceptual level, whiteboarding what it was we were going to build there. Similarly, we incubated Gist, and Paul was involved.

Chris Temple: I was introduced to Paul by my predecessor, Lance Conn, who recruited me out here. It’s obviously an interesting time to be changing jobs. Most of my background is in private equity, partnership based firms, not broad investment portfolios in large family offices. Paul is a fabulously complicated, smart, interesting guy. He’s got so many different elements and perspectives.

To think about it from a VC perspective, you’ve got a guy who knows how to code software. He’s a guy who designed user interfaces for commercially successful products, foresaw the PC revolution, and is a consumer and investor, rolled all into one at the table. It’s not like you sit down across the table from one person who has one perspective. In Paul’s case, he has all those experiences rolled into one. All in all, it’s rewarding, but it can also be challenging. In that, he can follow up a question about how or why a piece of software was engineered this way, or how it should look on the screen that way, as to how you’ll roll out a product and get it adopted through a certain distribution channel. There’s no way to get soft goals.

X: How much of the Vulcan Capital portfolio do you allocate towards venture, versus other kinds of asset classes?

CT: There’s not a hard and fast rule. There are three legs to the stool at Vulcan Capital. Venture is one of them. We have a more-mature-company, private equity effort, and we have what we call portfolio management, which is an alternative asset allocation function where we put capital outside the firm, whether it be venture capital firms or private equity firms or hedge funds, or other alternative asset managers. Those are the three components. One of the things is that by virtue of scale, venture investments tend to be small.

Over a five year period, if you put $200 million into a portfolio of venture firms—the portfolio management group could commit that to one hedge fund for a period of time. We have private equity deals where the check sizes have been $150 million-plus. When it comes to allocation, it’s not just dollars, but where you think you can leverage capabilities that we have internally as an organization, particularly given Paul’s background. It’s definitely part of the overall Vulcan Capital mix.

SH: I would add what you’ll see is that venture is a fairly modest sized effort in terms of team, number of companies, total dollars, and deals we do. But if you look over the five years as a team, we’ve deployed about $115 million into 20 companies. We deployed about $130 million into some wireless spectrum. It’s an average of 3-4 deals per year. We start very small, very early stage. Our average initial investment is $2.5 million. With Paul being the sole investor, we have a lot of flexibility to dial that way up, or down, as needed. We tend to target a $10 million to $15 million max investment over the life of the deal, in terms of total reserves put in. Venture is a labor-intensive, non-scalable asset class. Chris and the team look at asset allocation. They don’t have the luxury of saying, “We’re going to triple our venture exposure and do more deals.” You only have so many resources here to do that.

X: Can you talk about your strategy of partnering with other venture firms, and who you like to work with?

SH: We’ve really tried to focus on early-stage, theme-driven, syndicate-driven deals. We’re sort of just now coming up and looking at what we’ve done in the past five years and feeling pretty good about it. On the syndicate point, of those 20 deals, we’ve brought in an additional $700 million through third-party capital. As a ratio, if you think about it, about $500 million of that is subsequent to us coming in, because we’re early-stage. So in terms of executing on strategy, number one, we’ve said “Let’s not be the big fish, deep pockets around the table.” So when things go bust, not everyone is looking to us to write the big check. There was a little bit of that in the late 1990s that was certainly challenging for Vulcan. I think we’ve done a great job in diversifying the capital risk, getting the capital to companies so they have to execute, and getting in at an early enough stage where we can really leverage that appreciation.

The syndicate is not just about diversifying the capital risk, it’s about diversifying the value, and input you get around the table. We believe we add the most value at the true early stages. Often at the whiteboard level, [we ask] what’s this company going to be when it grows up, what’s the opportunity, what’s the ecosystem look like? Who are the winners and losers going to be. Looking four or five years into the future. You drive strategy around that, build the team around that, help take the risk out of that, where others don’t have the stomach to write a $500K check on a whiteboard or a deck, with two guys in a room. A lot of that has really been lost in venture, as venture has gotten bigger and bigger as an asset class, and single funds are $300 million or $400 million. You can’t do a $500K deal and expect your fund to work. We, largely because it’s Paul as a single investor, we have the flexibility to do that, both up and down, to start small but still back the thing with $10 million or $15 million all the way. But we don’t want to write a $15 million check out of the gate—we want to start small.

The way you win in venture is to put more capital in as the risk has been mitigated, but the returns are still substantial. If you look at BiPar, it’s a great case study. We were the seed investor that got it started. We started with a modest amount of capital. Over time, we’ve put $13 million in. It was probably our second largest deal. (We put $15 million into another deal, Audience.) A large holding for us as a venture team, not necessarily for Paul on the whole balance sheet, but we put that in as the risk got lower. It paid off. This is a deal where we’re going to get more than $100 million in cash. As a venture return, we believe this is one of the largest a Seattle-based investor has seen in the last five years or so. In 2009, it will be one of the better venture exits, period. Anywhere.

X: So who’s on the Vulcan Capital venture team, and what are their specialties?

SH: There are three of us. Myself, I’ve been here since 2002. The investments in the current crop, we really started investing in late 2003. The in-between year was a good bit of getting structure in place, the strategy, and managing through some of the prior investments. There’s myself and two others on the team, Stuart Nagae and Yongbai Choi. We really function as a single unit. For the most part, I’m the lead on the deals we do. We have a couple other affiliates. Michael Kranda, who has worked with us and remains active on a copule boards, for biotech advisory work. He brings expertise in that arena. We also have some other in-house expertise in the areas of clean energy and cleantech, alternative energy.

X: And how do you like to spread investments out across these tech sectors?

SH: My background is core technology. We’ve been increasingly doing activity in cleantech. We have four clean energy-related investments we’ve done. Because it’s a new sector for us, as it is for most VCs, we’ve paced our capital. We typically start with smaller equity stakes, non-lead roles, with our colleague Jill Watz, who brings energy technical background to the table. We’ve been able to get involved early stage in some core cleantech technologies. Our strategy is to partner with strong, deep-pocketed syndicates who have more expertise in the space. But at this point I can say that relative to other local investors in energy, solar, geothermal energy, we have quite a bit of expertise within our team. [See Luke’s separate story today on Vulcan’s biotech strategy—Eds.]

X: Tell us more about your investment themes, and how they’re different from the old days.

SH: Strategically, when we started deploying new capital back in late 2003, we made several changes. The first is we’ve gone early stage. We’ve gone earlier stage than many other traditional institutional investors. We’re willing to do sub $1 million dollar seed investments. They often look more like angel-size rounds. That’s reflective of our capital flexibility, as well as areas we can bring a lot of value to the table.

The second piece is a theme-driven approach. These are areas where we believe we have technical expertise, prior investment expertise. We can bring a focused effort to the table to make an investment decision, as opposed to getting involved in the early stages. There are other areas where we admittedly claim no expertise. We try to be very selective about the areas [where] we put capital.

If you look at the 20 companies we’ve invested in over the five-year time frame, most have an interesting backstory. The most active themes for us today [include] intelligent Web, and next-generation evolution of data. We invested in ZoomInfo as a result, we seed funded Radar Networks as a result. We created Evri in-house. Paul was very involved at that at sort of the whiteboard level. We spun it out and funded it. We created Gist in-house with T.A. [McCann], who was an entrepreneur-in-residence with me at the time. We whiteboarded that over a year ago, thought we were onto something, spun it out, and created it. That’s an example of how a single theme has led to derivative investments.

We’ve been very active in mobile as well, as a key theme. It’s broad in its definition. A few components we’ve been most interested in: We’ve invested in spectrum, two wireless spectrum auctions. One in 2003, and another in 2008. Let’s just say we saw the scarcity of spectrum, running against what we believe demand is for appliances, devices, smartphones, iPhone. With a view as infrastructure as the best way to play. Between spectrum, and another key investment, Audience, which is at the chip-set level, we’ve looked at a lot of opportunities in that space.

X: If you take out Charter Communications, are you beating the S&P 500?

CT: It’s a good question. I’d have to do the math. We do have some very good companies. You look at a company like BiPar, it’s a very good outcome for us. We have another company we invested in [in] 2004 called Plains All American, a publicly traded company. When Vulcan invested in that, it had about $250 million in EBITDA. Their public guidance this year is for north of $950 million. That’s up high single, low double digits from last year.

Diversification has helped. Diversification into different activities—not just media and technology and telecom, but hopefully into alternative energy and healthcare-related activities that hopefully are not correlated, and operate on different cycles, and hopefully can produce returns at different times. It’s a long-winded answer. I don’t know the short answer of whether we’re better than the S&P. I know we have some investments performing orders of magnitude better than the S&P, but that’s sort of damning with faint praise.

X: What surprises people in the entrepreneurial community when you tell them about your venture focus? Are there misperceptions out there?

SH: Absolutely. Let’s just all recognize that Vulcan does lots of things—Seahawks, etc. Paul is involved in a whole range of activities. If you talk to folks that have actively worked with us, Vulcan Capital is a normal, early stage venture fund. But at the broader level, there is a bit of a dated perception, really stemming from the late 1990s. Quite a bit of time has passed since then. The [old] Vulcan view of “big dollars, late stage, sort of haphazard strategy,” we can all own up to a bit. The perception is there. We haven’t been trying to change it, or spin it at a PR level. The best way to change it is through results and action. If you look at the last five years and the 20 deals we’ve done, it’s about a disciplined strategy, [having a] framework in place, executing on it, and then having some results to show for it. We can stand here today, and while we have many companies with a ways to go, I’m highly confident to say that for that vintage year, we are in the top decile.

The point being, we feel very confident that we have been quietly, under the radar, executing in an extraordinarily difficult venture environment. There’s still lots of room to prove that out. But things like Charter are big, big, symbols of investment strategy that are hard to get around. But that’s a decade old, and it’s not a venture deal. The entrepreneurs and investors we deal with know we bring traditional early stage venture investing expertise to the table.

X: What are your thoughts on the Seattle innovation scene? What are the strengths, weaknesses, and opportunities you see here?

SH: We’re very bullish on Seattle. All things being equal, we’ll do a Seattle deal any day over a Bay Area deal, or a Boston deal. We do have geographic diversity in the portfolio. Number one, the portfolio is theme driven. We’re looking for the best company doing X. It’s sort of happenstance if they are in your backyard or not.

That said, you have to factor in other dynamics. Availability of capital, competition, and so forth. What’s attractive about Seattle is there is a robust entrepreneurial base here of talent. In many ways it’s undercapitalized. We can count on one hand how many venture investors there are focused on early stage investments here. We’re seeing more guys from the Bay Area come up here for that very reason. So first and foremost, we don’t want to ignore our own backyard. We look at a lot of things with the Madrona guys. [See Part 1 and Part 2 of an Xconomy interview with Tom Alberg of Madrona Venture Group—Eds.]

There is strength in numbers. We’re not beating each other up on who’s going to get the hot deal, like the Sand Hill Road guys do. We openly collaborate, even do due-diligence together on early stage deals we look at together. We may not all be the right fit—every investor brings their own views and expertise to the table—but I think that’s what Seattle needs more of. A capital base to support the entrepreneurial ecosystem. We’re very bullish about it. Particularly as we’ve done true early stage deals like Gist. In a tough environment, bringing third-party capital in, we couldn’t be more excited about it.

Isn’t part of being a talented investor actually having some investments that have had exits and made some money? I don’t think there have been any such wins in the tech VC space for Vulcan since the 1990s.

In fact, not that it’s Steve Hall’s fault specifically, but Vulcan has a lot less money now than just a few years ago, forget about in the late 90s), thanks to Charter’s bankruptcy and some gigantically poor decisions to invest a lot of the money in private equity, stocks and hedge funds through Makena, by that genius Lance Conn.